Business Irish

Sunday 22 July 2018

Greencore shares continue to slide despite upbeat assessment from Jefferies

Greencore chief executive Patrick Coveney
Greencore chief executive Patrick Coveney

Gretchen Friemann

Greencore’s shares continued to drift downwards this morning despite an upbeat assessment of the company’s prospects from the US investment bank, Jefferies Group.

In a note to clients titled ‘6 reasons to buy [Greencore] this morning’ analysts Martin Deboo and James Letten, argued the recent volatility in the share price reflected "poor expectations management" rather than "performance and valuation fundamentals".

As the stock resumed trading after the UK’s public holiday yesterday, the pessimism that held sway last week seemed to show little sign of abating.

Greencore’s shares slid to £1.928 before rallying to £1.964, down 1.75pc (at the time of writing) from the last close.

But Jefferies’ insisted the negativity was overdone. Greencore’s shares plunged by close to 14pc in less than two days last week as news of a terminated contract with Starbucks filtered out in to the market.

The swift sell-off prompted Cantor Fitzgerald to downgrade its investment rating on the stock.

Read more: Greencore 'unaware' of reason for shares fall

By contrast Jefferies analysts described the share price at £1.9990 as on "the floor" and left its price target at £3 and retained its ‘buy’ rating.

But they claimed investor "confidence would appear to be at rock bottom" and argued management’s attempts to soothe nerves on Friday stead nerves served "only to compound the problem".

Yet they insisted the investment case in Greencore remains sound and estimated the frozen contract in the US, which is now being phased out, was worth close to "$75m (£60m) in sales."

Jefferies pointed out that if a 20pc contribution margin is assumed, that leaves a near "£12m EBIT impact"

While analysts argued they remain cautious about Greencore’s US earnings in FY18 – the firm has lowered its US EBIT expectations by £5m and group forecasts by close to 4pc – Jefferies pointed out the “sell-off has been twice that, from an already low base”

Jefferies also emphasised the recent acquisition of Peacock Foods for $747.5m, was snapped up "on a sensible valuation (10.4x EBITDA) and with a relatively easy-to-achieve synergy case".

The analysts stressed too that "cash is on its way" as the fruits of recent buying sprees start to materialise. "With capex set to fall below £100m in FY18, we are looking for free cash flow (FCF) of £40m in FY18, rising to £64m in FY19, equivalent to a yield of 4.9pc rising to 6.8pc."

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